Reinvesting in your business is critical to any company that wants to grow and take in additional resources and capital that would otherwise go to competitors. Companies that are relatively new and still in stages of early growth are more likely to reinvest versus distribute income to shareholders or owners.

Indicator

One way to see that a company has committed to reinvestment versus cash distributions is to examine the company's various financial statements. These show how much the company has paid, if any, in dividends. It also shows how much the company has accumulated in retained earnings. This is the balance of earned net income held for reinvestment or to meet other ongoing expense obligations of the business.

Increased Profit

A primary business reason to reinvest in growth is to increase revenue and profit. By attracting new customers, adding new business locations or adding new products, your business can increase its number of revenue streams and hopefully generate increased profit from them. Adding new sources of income also helps insulate your business from the risks of operating with one primary source of income in the event that source dries up at some point.

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New Capital

New or developing markets, or emerging customer segments, are ripe for the taking. While small businesses especially might consider sticking to what they know and staying comfortable, the race for new capital and income streams is critical. If your competitors gain access to those new market opportunities because they invest in growth, they also get new funds to use for marketing, which increases demand, and further reinvestment in growth going forward.

Reinvestment vs. Dividends

From a shareholder perspective, a company that reinvests its income instead of pays dividends is in growth mode. While this means shareholders do not get cash distributions from their shares, they can feel more confident that the company wants to grow. Over the long run, growth in the size and profit potential of a business increases the value of its shares or the value of having an ownership role and financial stake in the business.

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About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.